China State Grid quietly builds Mediterranean power network

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PARIS — The European Commission has long wanted the continent’s power grids to work in unison for reasons of efficiency and supply security, so far to little avail, but a regional power network could soon be a reality, courtesy of State Grid Corporation of China.

While Europe’s utilities have met hostility to cross-border forays and been outbid by infrastructure funds, State Grid, the world’s largest utility by revenues, with its deep pockets and reputation for hands-off management, has had an easier ride, buying minority stakes in Portuguese and Italian grid operators and pursuing designs on Greece and Spain, too.

If all goes to plan, it would become the first utility to build a major regional electricity grid portfolio, a feat that the Commission had hoped Europe’s big grid operators would have achieved in the five years since it forced the separation of the grids from power production to increase market competition.

For wholly state-owned State Grid, which distributes electricity to 1.1 billion people across 90 percent of China, the appeal of the consistent, regulated income from European power assets is obvious.

A State Grid official familiar with its overseas strategy said projects abroad typically yield high single-digit to double-digit returns, compared with low single digits at home.

Its relatively low yield requirements give it an edge over Western infrastructure funds and European sector peers.

In a recent statement, an official in State Grid’s international business department said it was actively investing in regulated electricity assets and realizing steady returns.

“When we make overseas investment, we are not doing charity,” he said.

As State Grid builds up its portfolio, it could start thinking about linking up its assets across the region; the ownership of several grids by one operator allows easier cross-country power-load balancing, so it doesn’t get caught out by peaks in one area and can shift power within its own network rather than being forced to parlay with a competitor.

In 2012, State Grid bought 25 percent of Portuguese grid operator REN, then last month it entered Italy with a deal to buy 35 percent of CDP Reti for at least $2.8 billion.

CDP Reti owns 30 percent of gas transport group Snam and is set to receive a similar stake in power grid Terna.

State Grid, with Terna and Belgium’s Elia, is also bidding for 66 percent of Greek grid operator ADMIE, sources told Reuters in May, and is interested in bidding for German utility E.ON’s northern Spanish grid, which serves 650,000 customers and could sell for as much 1 billion euros, a source familiar with the parties told Reuters.

E.ON has launched the sale process and first bids are due next week.

“After the recent investments of SGCC in South Europe, there is indeed a strategic positioning within the region,” Yiannis Yiarentis, ADMIE chairman and CEO, told Reuters.

Patient and discreet, State Grid only invests where it is welcome, shying away from hostile bids, and has seized on the opportunities afforded by privatizations in cash-strapped southern euro zone countries.

Zheng Baosen, State Grid executive vice president, told Reuters last year China was ready to invest further in European utilities “if the price is right.”

In addition to Europe, it has made major investments in power grids in Brazil, the Philippines, Australia and Hong Kong.

Its total overseas assets now exceed $23 billion, and the profits of its overseas operations rose to $520 million in 2013 from 800 million in 2009.

An official at a Brussels-based utilities lobby said Chinese utilities have huge ambitions in Europe and are sending countless missions to ask for advice on where to invest.

Besides China’s grid operator, its power producers are also breaking into Europe. In 2011, China Three Gorges paid 2.7 billion euros for a 21 percent stake in Energias de Portugal, and EDP chief executive Antonio Mexia has said his shareholder is looking at other opportunities in Europe.

In October, China General Nuclear Corporation and China National Nuclear Corporation agreed to take a joint 30-40 percent stake in an EDF-led consortium to build a 16 billion pound nuclear plant in Britain.